Angel Insights Blog

By: Roland Schumann, a successful entrepreneur who was a pioneer in the cloud computing industry. He is an active angel investor, serving on both the Executive Committee and Screening Committee of the Sierra Angels investment group based in Lake Tahoe.

As a member of the Sierra Angels, I’ve had the chance to think about what makes angel group members effective. While some angels merely sit on the sidelines and view the investment process from afar with little personal involvement, others choose to roll up their sleeves and actively investigate promising deals. The 7 habits identified below are intended to help all angel investors understand why getting involved as an active participant will greatly increase their likelihood of success.

1. Personal Involvement in the Selection Process – The idea of finding and investing in a promising startup company is both exciting and seductive. Being an early investor in the next Facebook or Google conjures visions of amazing wealth and fame. However, while many aspiring angel investors would love an astronomical return on their investments, relatively few of them are willing to commit the time and effort necessary to make that outcome possible. Separating the weak companies from those most likely to succeed requires the collective skills of a committed team. By volunteering in an angel group’s selection/screening committee, the investor can help determine which companies are worthy of investment by the group. Further, when companies have been selected by the committee to make a presentation to the angel group’s larger membership, spending time with the entrepreneurs to provide coaching and ‘lessons learned’ from previous presentations will go a long way in helping the company succeed.

2. Willingness to Learn About New Industries and Technologies – The majority of deals angels encounter will be in areas that are outside their realm of knowledge. If they choose to wait only for opportunities in industries that they already know about, it will limit their likelihood of success as angel investors. Instead, if angels consider deals that are focused on things they are interested in but don’t necessarily have expertise with at the professional level - they can greatly expand the universe of potential deals and add to their lifelong learning. They may also learn from other angel group members who do have experience in other sectors.

3. Participating in the Due Diligence Process – Once an angel group has decided that a particular deal seems to have merit, the process of vetting the opportunity is usually complex and time-consuming. It is important to verify the entrepreneurs are qualified, the business is sound with legitimate viability in the marketplace, and that other aspects of the business (such as the customer pipeline) have been presented honestly. Collecting and analyzing all of that information would be overwhelming for just one or two people. However, when a group of angels volunteers to help with the due diligence process, the workload can be divided and accomplished quickly. Often, some members of a due diligence team will determine in the end that they don’t like a deal and will opt to not invest. In contrast, there are plenty of deals where angels didn’t participate in the DD step, but decide to invest based on personal desire and whether other respected members of the group have decided to invest.

4. Recognizing When to Commit or Walk Away – By getting involved in the selection and due diligence processes, angels develop the ability to discern when a deal seems right and, equally important, when one or more facets of the opportunity just don’t line up the way they should. That discernment is critical when evaluating components of the business. For example, if a key reference that was provided by the entrepreneur won’t return phone calls or is unwilling to speak candidly, an experienced angel will see a red flag and look at other deal-related information much more critically.

5. Keeping Engaged After the Deal Closes – The best angel deals are those where the entrepreneurs have sought investment from ‘smart money’. Specifically, those are investments from knowledgeable angels who are willing to not only write checks but who also want to keep involved and assist as the company navigates its way through the challenging startup seas. Angels need to feel comfortable checking in with the company periodically to see how things are going and if there are areas of concern or challenge that could be helped by individual investors with specific expertise.

6. Actively Mentoring New Angel Investors – When someone decides to become an active angel, networking among angel investors is critical to the knowledge-transfer process. While formal training programs such as those offered by ACA are invaluable, much can be learned by shadowing experienced angels as they participate in the various aspects of angel investing selection, coaching, and due diligence. Experienced angels need to step up and be willing to coach those who are just entering the angel investing arena.

7. Mentoring Entrepreneurs to Help Them Succeed – Entrepreneurs - especially first-time entrepreneurs - are almost universally filled with passion and a vision of what they want their companies to become. However, many are lacking the basic skills that are essential to their success. For example, they may not know how to properly staff their management team, raise startup capital, or prepare solid financial projections. By volunteering as a mentor through a structured mentorship program such as the Summit Venture Mentoring Service in Reno, NV, angel investors are able to help entrepreneurs focus their efforts, learn new skills, and be better positioned to succeed. At the same time, the angels are able to identify companies that may be qualified to present to their own angel investment group.

These habits are not only increasing my chances of success through angel group investments, but are making my membership in Sierra Angels all the more fun.  The next time your group asks you to get more involved, take them up on the offer!